EU 'would be allowed to change countries' budgets' under draft plans

The European Union could be handed powers to change countries' budgets if they
breach debt and deficit rules, according to a draft document.

Eurozone governments will also be forced to collectively agree their debt levelsPhoto: Reuters

By Telegraph staff

11:40AM BST 26 Jun 2012

The news came as finance chiefs from Germany, France, Italy and Spain hold last-minute talks in Paris to try to narrow differences on the currency area's future.

The draft plan, set to be discussed at the EU summit on Thursday and Friday, would create a closer fiscal and banking union that would turn Brussels into a finance ministry for all 17 eurozone members.

The report was prepared by European Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, European Central Bank President Mario Draghi and President of the Eurogroup, Jean-Claude Juncker.

Fears over the financial health of the single currency grew on Monday after Cyprus became the fifth country to formally request EU aid, Spain asked for external loans to deal with its banking crisis and the new Greek finance minister was forced to step down due to ill health.

Germany has demanded that national budgets be subjected to strict controls as a prerequisite for mutualising debt and issuing eurobonds.

Under the latest plans, the European Commission would reveal detailed adjustments for any country that breaches its commitments. Such changes would be subject to an EU-wide vote.

"The process towards the issuance of common debt should be criteria-based and phased, whereby progress in the pooling of decisions on budgets would be accompanied with commensurate steps towards the pooling of risks," said the report.

"Several options for partial common debt issuance have been proposed, such as the pooling of some short-term funding instruments on a limited and conditional basis, or the gradual rollover into a redemption fund.

"Different forms of fiscal solidarity could also be envisaged."

Eurozone governments will also be forced to collectively agree their debt levels as well as the limits of their national budgets annually. Other eurozone governments will have to give prior approval to any country that needs to increase its borrowing.

A eurozone banking union, needed to break the vicious circle between indebted sovereigns and weak banks, which hold bonds of the indebted governments, would entail integrated European supervision, deposit guarantees and bank resolution.

Depite being merely a proposal, the EU currently has the power to punish nations that refuse to adopt such plans.